‘Ottawa’ Quebec Food Court Champion MTY Foods Takes a Bite Out of U.S. Market with US$300 Million Kahala Acquisition
MONTREAL — With the patience of a hungry customer who carefully looks over the restaurants at a food court before ordering a meal, MTY Food Group Inc. has acquired the Arizona-based Kahala Brands Ltd. franchise company, which will finally bring it into the U.S. market in a big way.
MTY has been looking to grow, and on Wednesday the Montreal-based company announced it has paid US$300 million for Kahala in a friendly deal that will add 18 brands to its current 30 restaurant banners, familiar to just about anyone who has been to a mall or airport across Canada, including Mr. Sub, Thai Express and Jugo Juice.
At the moment, MTY has just 80 stores in the U.S., but with the Kahala banners it will add close to 2,000 in July when the deal is expected to close.
“The two companies share the same philosophy, the same platform and same background. I think it’s the perfect fit,” said MTY founder and CEO Stanley Ma in an interview with the Financial Post, adding that the headquarters will be staying in the Montreal area.
About US$240 million of the price will be paid in cash and the rest with 2.25 million MTY shares to acquire Kahala and its brands, including as Cold Stone Creamery, America’s Taco Shop and Kahala Coffee Traders.
“Most of the time these days it’s a U.S. company buying a Canadian company,” Ma said. “This is good news for Quebec.”
Ma started his first restaurant, Le Paradis du Pacifique, in 1979 with a single location in Laval, Que.
“It’s the only way I know how to make a living,” he said.
Although Ma speaks with the modesty of a small business owner, the combined MTY entity will have approximately 5,500 stores under 57 brands across North America.
MTY generated more than $1 billion in system sales last year while Kahala brought in about $950 million.
During the 12 months following the acquisition, the company expects to generate more than $90 million in EBITDA, $250 million in revenues and $2 billion in system sales.
Kahala CEO, Michael Serruya, says he sees an opportunity to introduce MTY’s Canadian brands into the U.S., though Ma said he would wait until after the deal closes before rolling out major changes to the businesses. Ma wouldn’t say whether any of the existing Kahala brand locations would be transitioned to MTY brand locations.
“Kahala represents a strong and unique platform for MTY to continue its U.S. and international growth,” said Serruya.
“The deal represents an amazing opportunity for both companies to leverage their unique platforms and to dramatically accelerate their growth plans going forward.”
Although there is some risk involved in stepping into the U.S. market, Jesse Gamble, an associate portfolio manager at Donville Kent Asset Management, says the conservative nature of MTY’s management team makes him confident this is a well-planned decision.
“We’ve known something like this has been coming for a while … we understood that if they did a deal it would be the right deal and we trust in them,” said Gamble.
“This is just a game they have to play because they are a growth by acquisition company and as you get bigger, you have to do bigger deals.”
Following the news of the acquisition, MTY’s stock popped 16.48 per cent to $41.56 by 12:03 and even at these levels Gamble says the stock is undervalued as the company has now doubled its size and issued just 20 per cent equity.
“Based on simple numbers like this you know how much value this is going to create,” he said.
Still, Gamble says this stock is not for day traders, as the stock has seen modest though very sustained growth and the small daily volumes do not allow for quick sales.
“You’ve got to stay in that stock, you’ve got to trust management, you have to know what your valuations are and then you just have to ride it,” he said.